WAGES &INCENTIVES

Book: Industrial Engineering & Production Management[available in the BIFT library]

WAGES: These are the payments made by the employer to the efforts put in by the workers towards production.

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NOMINAL WAGE / MONEY WAGE: It is the amount of money paid to the worker in cash for the efforts of the workers towards production and no other benefits are given to the workers. This is called money wage.

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REAL WAGE: It represents the amount of necessaries, comforts, luxuries and cash payments a worker gets in return for his efforts. Some organization provide their employees certain essential commodities, housing with free electric and water charges, uniforms and other such facilities in addition to the money in cash. If all these amounts are considered for wage, it becomes real wage.

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LIVING WAGE: When the wage rate is such that it covers some of the requirements of the family like food, cloth, education it is referred to as living wage. FAIR WAGE: It is a wage which is to be considered as a fair amount of return for the efforts of the employees and should be able to cover the other necessities of life, apart from basic necessities like food, cloths and shelter for his family.

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Minimum Wage

Minimum wage is fixed taking into consideration the factors such as cost of living maintaining the efficiency of the worker, keeping them motivated and paying capacity of the industries.

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The objective of minimum wage

• To protect the sections of working population whose wages are very low.

• To prevent the exploitation of workers.• To improve general standard of life.• Satisfactory compensation towards efforts

expended by the worker.

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NEED FOR RATIONAL WAGE POLICY

A sound wage policy should be aimed at social justice and the workers should get their due share for their efforts:The rational wage policy should consider the following aspects:

• Fixing minimum wage• Wage structure

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FACTORS INFLUENCING WAGE SYSTEM

• Labour market that is supply and demand of labour.

• Bargaining capacity of the employer and employees.

• Worker’s skill, knowledge and experience.• Cost of living.• Legal and statutory restrictions.• Organization’s ability and willingness to pay.

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CHARACTERISTICS OF GOOD WAGE SYSTEM

• A good wage system should be acceptable to both employees and management.

• It should guarantee a minimum wage to the employee.

• Should be able to keep the worker motivated.• It should provide a scope for employees to get

reward for additional or extra effort.

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• It should be consistent and should not be altered frequently.

• Should believe in equal work and equal pay.• The system should be simple and should be

understood by all concern.• Proper encouragement should be given to

utilize the full potential of all employees.• Should make the work challenging and

interesting.

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TYPES OF WAGE PAYMENT

• Wage payment on the time basis.• Wage payment on the output basis.

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WAGE PAYMENT ON THE TIME BASIS

Under this method wages are paid to the employees based on the time for which they work. The wage rate are predetermined in terms of taka per month, per day or per hour. In this system the workers are paid on time they work irrespective of output they produced.

This system is applicable where output is not quantifiable and it is not the criteria for payment, where work is not repetitive type.

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ADVANTAGES

• System is easy to understand and simple to operate.

• The quality of the work is maintained as employees are not in a hurry to increase quantity.

• There is a scope for improvement in work methods.

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DISADVANTAGES• Does not provide incentive to ambitious and

more efficient employees.• The output will be lowered in the absence of

strict supervision.• The basis for the wage is time not the output

or efficiency. So it happens that less efficient workers are paid equal to the efficient workers.

• Employer will gain or loose by the increase or decrease in output.

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PIECE RATE SYSTEM

In this system, wages are paid to the employees in relation to the output produced. This method is very convenient where each individual worker is capable of performing his work without any dependence on the other individual. This method can be applicable to the work of repetitive nature.

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ADVANTAGES

• It provides incentives to efficient workers.• Cost of supervision is low compared to the

time based system.• Higher speed increases the production rate

and hence reduce the cost per unit.

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• Increases the utilization of production facilities.

• Workers innovate new ways and method of doing the work in order to reduce the time per unit.

• Motivates workers to produce more.

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DISADVANTAGES

• Workers in order to increase their wages through faster working, may neglect quality.

• Because of speed, worker may be prone to accident as it is possible that he may neglect precautions and safety measures.

• The security for the worker is low and this may seriously punish the aged and inefficient workers.

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INCENTIVE SCHEMES

Incentive schemes are intended to increase worker’s motivation by allowing them to earn proportionately higher returns from greater efforts.American society of mechanical engineers (ASME) defines a wage incentive plan as “a method of payment which directly relates earning to production. A system which enables workmen to increase their earning by maintaining or exceeding an established standard of performance.”

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Incentive schemes are of two types:• FINANCIAL INCENTIVES: These are the

rewards paid to the employees efforts in cash.• NON-FINANCIAL INCENTIEVES: These are the

non monetary incentives (other than cash).

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SOME EXAMPLES OF NON-FINANCIAL INCENTIVE SCHEME

• The incentive may include provision for good housing, with all modern amenities (Things that make you comfortable), recreation facilities, medical facilities etc.

• Promotion to employees and facilities for personal growth.

• Foreign training.• These may include gift items, discount

coupons, special holidays etc.04/08/2023 22

Individual incentive scheme

Under individual incentive scheme, individual employee is paid incentive on the basis of individual performance or output. The incentive is regardless of the output or performance of the group or department or organization. The employer is liable to pay incentive to those employees who are producing more than standard output.

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Group Incentive schemes

Under group incentive scheme, each employee is paid incentive on the basis of collective performance of his group to which he belongs. This group incentive is preferred by the management as in turn they are getting an output from the group. With in a group each employee is going to get equal share of the incentive. Highly competent or productive employees are not in favor of this scheme.

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Characteristics of a good Incentive System

• The plan should be simple and employees should be able to calculate his earning.

• The incentive scheme should be consistent and should not be altered too often.

• The incentive scheme should motivate the employee to produce more.

• There should be direct relation between effort and reward.

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1. Taylor’s differential piece rate system

Under this system, a standard output for the day is fixed based upon accurate time and method study. The employees who achieve this standard or produce more than the standard are given higher rates than who fail to reach the standard.

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Characteristics of the system

• The day’s wage and earning is not guaranteed.• Two piece rates are applicable.• Lower piece rate is considered for below

standard performance and higher piece rate for standard and above standard performance.

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Advantages

• Worker is paid as per efficiency.• Reduce the supervision to minimum.• Encourage the operator to produce more to

earn more.• It ensure the better utilization of resource.

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Disadvantages

• Worker in order to earn more will not care much for quality of the work. Hence more wastages and rejection.

• Quantity orientation makes the worker to work fast, in due course he may neglect safety measure.

• The decrease in demand may have an adverse effect on the employees.

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2. Merrick’s differential piece rate system

This system is similar to the Taylor's differential piece rate system. It provides three piece rates as compared to two piece rates given by Tailor.

• Up to 83% of standard output: standard rate per piece.

• Over 83% up to 100% : 1.10 x standard rate per piece.

• Over 100% : 1.2 x standard rate per piece.

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Characteristic of the system

• Minimum wage is not guaranteed.• Standard rate is established after a through

analysis of each job.• It encourages the worker to produce more and if

they come up over 83% of standard performance, they are going to get the piece rate above standard piece rate.

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3. Gantt task and bonus scheme

• Minimum day wage is guaranteed irrespective of the performance of the worker.

• The actual output of the worker is compared with standard output to calculate efficiency.

• Time wages without bonus are paid below standard performance.

• Time wages plus an increase in wage rate is considered at standard performance.

• A high piece rate is considered in place of time wages above standard performance.

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• Output below standard: time wage• Output at standard: time wage + 20% bonus• Output above standard: higher piece rate on

entire production

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4. HALSEY 50-50 PREMIUM PLAN

• It guarantees the fixed wage to slow workers and at the same time additional payment to efficient workers.

• The plan does not give bonus on the time saved but it gives bonus on only a percentage of time saved.

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5. ROWAN PREMIUM PLAN

• It provides each workman a guaranteed minimum wage plus bonus for certain portion of time saved.

• The proportion of time payable for incentive being the ratio of actual time taken to standard time.

• Employer will get the partial benefit of the increased output.

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6. BEDAUX POINT PREMIUM PLAN

• Guaranteed wage rate up to standard performance.

• Guaranteed wage rate plus incentive bonus is paid above standard performance.

• Incentive bonus is 75% of points saved multiplied by one sixtieth (1/60) of worker hourly rate.

• One point equals to one minute saved.

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7. EMERSON’S EFFICIENCY PLAN

• Day wage irrespective of output produced is guaranteed.

• Actual output of the worker is compared with standard output to calculate efficiency.

• An incentive bonus is paid to the workman of his output exceeds 66.67% (2/3) of the standard performance.

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• Earning in this method are computed as under:• Efficiency up to 66.67%: no bonus only time wages.• Above 66.67% up to 100%: time wage + bonus at

different percentages increasing rapidly to 20% at 100% efficiency.

• Over 100%: time wages + 20% bonus + 1% bonus for each 1% increase in efficiency beyond 100%.

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Scanlon Plan

• This is a group incentive plan.• This is applicable to employees throughout the

organization.• All employees receive a guaranteed time wages.• Ratio of labor cost to total sales value is set as an

index of total labor effectiveness.• Actual labor cost to the total sales value is calculated

for the assessment period.• An incentive bonus, equivalent to % reduction in

labor to sales ratio is paid to each employee.04/08/2023 39

Priestman Production Bonus

• Group incentive plan.• All employees are paid guaranteed time wages.• A standard output to be achieved (by factory or dept.)

is agreed upon by employer and union representative. Output is expressed in units.

• To determine standard output, number of workers in employment is taken in to account.

• Actual output is compared with standard output. If actual output exceeds standard output, each employee is paid production bonus in proportion to increase in output per worker.04/08/2023 40